Hyundai Motor Company-Beijing Automotive Joint Venture Case Study Topics in Emerging Markets Prof. Mei April 9, 2003 Michael Cheng

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Hyundai Motor Company-Beijing Automotive

Joint Venture Case Study

Topics in Emerging Markets

Prof. Mei

April 9, 2003

Michael Cheng-

Richard Lee-

Kevin Park-

Table of Contents:
Executive Summary: 3

Case Study:

Introduction: 4

Case Background: 5

Hyundai Motor Corp Background & History: 6

South Korean Macro Study:

Economic Background: 7

Social Climate: 9

Political Condition: 10

China Macro Study:

Overview: 12

China and the WTO: 13

Korean Foreign Direct Investments in China: 14

Current Chinese Automotive Industry: 15

China’s Automotive Industry Outlook: 16

Asian Financial Crisis:

Summary: 17

Recovery: 18

Hyundai Motor Corp Financial Analysis:

Introduction: 20

Detailed Financial Analysis: 21

Equity Valuation: 24

Conclusion: 24

Case Solution:

Project Valuation: 25

Input Descriptions: 25

Conclusion: 27


Hyundai Motor Corp Financial Statements 29

Bibliography: 32

Executive Summary:
In this case study, we will examine the probability of success of Hyundai’s new joint venture with Beijing Automotive in China. On February 5, 2002, Hyundai announced a 50-50 venture to set up a production facility in China. The joint venture plant to be set up in Beijing will initially produce 100,000 units of Sonatas and Elantras, then gradually increase to 200,000 units by 2005 and will cost an estimated $250 million. If the venture is a success within these years, then Hyundai will invest an additional $1.1 billion to increase production to 500,000 by 2010’s year-end.

Hyundai, established in 1967, has come along way from its humble beginnings. Riding the wave of South Korea’s economic growth in the past three decades, Hyundai has become a global player in the automotive industry. In 25 years, Hyundai grew from producing a few hundred cars per year, to exporting cumulative shipments of over 5.5 million units. As such, it is imperative that Hyundai strives to continue to expand and diversify in other countries, namely, emerging markets. Attributing to this growth are joint ventures with other automotive manufacturers.

We believe that there is tremendous opportunity to be realized in these strengthening Asian economies; China is one of the leaders in receiving foreign direct investments in the world, and this is a strong testament to its economic potential in the near future. This case will introduce students to two of the strongest emerging markets and will explore the automotive relationship between Korea and China. Our hope is that students will recognize this potential and take advantage of it as they embark on their professional careers.
Hyundai Motor Corp Case Study:

Building a Car Manufacturing Plant in Beijing
Towards the end of a monthly board meeting, Richard Lee, CEO of Hyundai Motor Co., leaned over the table towards his CFO, Guan Woo Park, and asked, “Do you think we should invest the projected $1.1 billion in 2005 in our newly-constructed manufacturing plant in China to boost production to our desired 500,000 units per year by 2010?”

Mr. Park confidently replied, “Let me get a team together and run the numbers, and I will have my recommendation on your table in no time at all.”

“Ok, get to work on that, and have a report for the Board the next time we meet.”

“Got it, sir!”

Mr. Park thought about his task for a moment, and before starting, he required extra knowledge and expertise about China and its automotive industry. Mr. Park immediately proceeded to call his good colleague, Michael Cheng, who worked for Mckinsey & Co. in China. Mr. Cheng had a vast knowledge of the automotive industry in China. He previously worked as a car salesman in China for several years and was very familiar with the country’s imports and exports of automobiles. Before valuating the project, Mr. Park felt like he still needed someone to paint a better picture of China’s demography as well as its political and economic status. Therefore, he called upon his good friend, Mr. J.P. Mei, who works for the government of China. Mr. J.P. Mei was also very familiar with foreign direct investment processes through a large number of projects dealing with global companies.

Mr. Park flew all of his buddies in from China, and the group got started on building a recommendation for the Board of Hyundai Motor Company. Mr. Park felt confident and excited as he embarked on his recommendation for the manufacturing plant in China. But before they crunched any numbers, the group had a couple of major questions they had to consider: How should this project be financed? What is an appropriate cost of capital for the project? How will revenues be projected from year to year?

The three colleagues stared at each other for a moment, scratched their heads, and strapped on their thinking caps....

Case Background:

In recent years, the Asian financial markets have suffered tremendously, to say the least. Only recently have the Asian markets improved. Of the countries in the Asian financial crisis, South Korea has been one of the countries that survived the crash and is now thriving. Scandals, corruption, and bad accounting are in the process of being addressed, and the traditional “Jaebuls” are slowly disappearing and being replaced with more structured management. Korean businesses have experienced and survived the worst part of the Asian market crisis and the future of those companies has much potential in becoming global players in all industries.

China, the most populous country in the world, has just opened its doors to the world of automotive trade. Analysts have commented that for Chinese automakers to survive, they must partner up or parish. Hyundai, having already set up four other production plants in China, has been successful. However, with a volatile global market and changing trends, will Hyundai be able to make their biggest investment project pay off?
Hyundai Motor Corp. History and Background
Hyundai Motor Corp was established in 1967 and is South Korea’s #1 carmaker. Hyundai product line includes roughly a dozen models of cars and minivans, trucks, buses, and other commercial vehicles. In 1998, it acquired a 51% stake in Kia Motors, resulting in its position as the leading carmaker in Korea. Hyundai's main exports include the Accent and Sonata models, while its Korean domestic models include the Atoz sub-compact.

Hyundai hopes to establish a strong worldwide manufacturing presence. DaimlerChrysler has purchased a 9% stake in Hyundai as part of a plan to boost DaimlerChrysler's Asian market presence. The two companies plan to form a joint venture to develop small cars for the global market.

It initially began manufacturing cars and light trucks through a joint venture with Ford. However, by the early 1970s Hyundai was ready to build cars under its own name by debuting its subcompact Pony in 1974.

The Pony was a great success domestically and soon propelled Hyundai to the top spot among Korea's carmakers. During the mid-1970s, the company began exporting the Pony to El Salvador and Guatemala. Several years later, Hyundai started to mass produce and anticipated penetrating strategies into markets around the world including Canada.

Hyundai then introduced the Hyundai Excel in 1985. That very year the company established a subsidiary in the United States, the Hyundai Motor America. Hyundai exported Excels to the US and sales soared the next year. Building on this success, it built a factory in Quebec, Canada. The company introduced its first sports car, the Scoupe, in 1990. The following year it developed the first Hyundai-designed engine, called the Alpha. Two years later Hyundai unveiled its second-generation proprietary engine, the Beta.

By 1998 Hyundai was beginning to feel the pinch of the Asian economic crisis as domestic demand dropped drastically. However, the decrease in Korean demand was largely offset by exports. Hyundai not only established a joint venture with DaimlerChrysler but went on to establish a collaboration with Mitsubishi Motors to further develop small cars for the global market. It is also important to note that Hyundai acquired Kia Motors in 1998, thereby increasing their market share in South Korea.

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